I first heard the “we owe it to ourselves” rationalization for runaway government borrowing more than 30 years ago in college from a professor of Soviet history, a gentle man who hoped for a gentle communism. Economist and New York Times columnist Paul Krugman recently echoed that sentiment in a column titled “Nobody Understands Debt,” in which he, too, says not to worry about government debt because “we owe it to ourselves.”
According to a recent Obama administration announcement, we owe “ourselves” nearly $15.194 trillion and soon will be required to raise the national debt ceiling once again to keep paying for all the things government gives us, which apparently consists mainly of ever-increasing debt. The national debt, after all, already exceeds the nation’s entire annual economic output.
No worry?
Krugman’s argument has been around a long time, as my kindly commie-sympathizing professor’s comment attests. He and Krugman both argued government debt is not like household debt, because households owe money to someone else and must pay it back, whereas governments don’t need to pay back borrowed money.
They can keep rolling over the debt and need only hope that growth in the tax base exceeds growth in the debt. The debt is a big wash, they say, because debts and credits balance out.
“U.S. debt is, to a large extent, money we owe to ourselves,” Krugman wrote. But who, exactly, is “we” and who is “ourselves”?
Most Americans borrow money from other Americans. When I borrow from a bank, that borrowing is made possible by the money deposits of thousands or even millions of other people, depending on the size of the bank.
If I don’t pay back the money, the bank and all its depositors and investors suffer. If it’s a government-guaranteed loan, taxpayers suffer. Is that not also us borrowing from ourselves?
And surely China, Japan, Germany, Saudi Arabia and other countries will want to be repaid on the U.S. bonds they’ve purchased. Is owing money to China, Japan and other countries owing money to ourselves?
Some Americans hold government debt in 401(k)s, pension funds, individual retirement accounts, etc., and from direct purchases they may have made. Others own no government bonds.
To argue government debt is a wash because debts and credits balance out is like arguing it would be a wash if the government took $1 billion from my town and handed it to people in the neighboring town. It’s true the total amount of money in the nation would remain the same. But try telling the people in my town this would be a wash.
Krugman does acknowledge some costs of government borrowing, writing, “Taxes must be levied to pay the interest, and you don’t have to be a right-wing ideologue to concede that taxes impose some cost on the economy, if nothing else by causing a diversion of resources away from productive activities into tax avoidance and evasion.”
But then he says the costs “are a lot less dramatic than the analogy with an overindebted family might suggest.”
But using Krugman’s reasoning, don’t the citizens of Greece, Ireland, Portugal, Spain and other teetering countries also owe their government’s borrowed money to themselves?
Ask them if the costs are not dramatic.
Steve Stanek is a research fellow at the Heartland Institute in Chicago.
